Major Changes in Unfair Competition Law in Colorado and Nationally September 30, 2015

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LITTLER COLORADO SHRM 2015 STATE CONFERENCE

Josh Kirkpatrick Shareholder Littler, Denver

• Colorado Law • Blue Penciling: In Colorado & Nationally • Hot Topics in Unfair Competition Law • Major Events in Unfair Competition Law

Outside of Colorado

What’s Worth Talking About

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LITTLER COLORADO SHRM 2015 STATE CONFERENCE

• Applies to: – Covenants Not To Compete; – Agreements Not To Solicit Customers; and – Agreements Not To Solicit Coworkers (maybe).

Colorado Law: C.R.S. § 8-2-113(2)

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• Purchase Or Sale Of Business Or Assets Of A Business • Protection Of Trade Secrets • Recovery Of Education And Training Expenses

– Term Of Employment < 2 years • Executive, Management, and Officers

– Plus Professional Staff To Executive And Management

Colorado Law: C.R.S. § 8-2-113(2)

• C.R.S. 7-74-102(4) • “Trade secret” means the whole or any portion or phase

of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value.

Protection Of Trade Secrets

• A company must take reasonable steps to maintain the secrecy of the claimed trade secret. – Who gets access to it? – Are hard copies controlled? – Are documents stamped confidential? – Are visitor logs maintained? – Do customers sign NDAs?

Is It Really A Secret?

1. The extent to which the information is known outside the business

2. The extent to which it is known to those inside the business, i.e., by employees

3. The precautions taken by the holder of the trade secret to guard the secrecy of the information

Trade Secrets: Six Part Test

4. The savings effected and the value to the holder in having the information as against competitors

5. The amount of money or effort expended in obtaining and developing the information

6. The amount of time and expense it would take for others to acquire and duplicate the information.

Trade Secrets: Six Part Test

• Publicly available information can still be a trade secret if: – Unique Compilation – Value – Competitive Advantage

Trade Secrets: Compilations

• Customer Solicitation – When is a customer list a trade secret? – Social Media

• Employee Solicitation • Products • Positions • General Competition

Trade Secrets: Key Restrictions

• Temporary and final injunctions including affirmative acts may be granted on such equitable terms as the court deems reasonable to prevent or restrain actual or threatened misappropriation of a trade secret. C.R.S. 7-74-103

Inevitable Disclosure Doctrine: Colorado UTSA

• DISH v. Altomari, 224 P.3d 362 (Colo. App. 2009) • Employee qualified as management personnel under

Colorado’s statute because he was a “mid-level manager who supervised fifty employees, was otherwise at the top of the compensation scheme, was employed in decision-making capacity, and had a certain level of autonomy.”

• Sales employees are not “managers” • Evaluated as of the time the employee signed the

agreement

Executive Or Management: Who Qualifies As A Manager?

• “Professional” not limited to doctors, attorneys, or engineers

• Cases look to factors like: – Reports to management – Independent discretion – Experience – Level within company

Professional Staff To Executive Or Management

• “Blue-Penciling” allows a court to modify and narrow non-compete agreements so that the scope is reasonable.

• In Colorado: No Blue Penciling in all circumstances.

– Unenforceable agreements are void ab initio. – But time and geography can usually be blue penciled.

Blue-Penciling: Colorado

1. Colorado Accounting Machines, Inc. v. Mergenthaler, 609 P.2d 1125 (Colo. App. 1980). • Stated purpose must be to protect trade secrets.

2. Gold Messenger v. McGuay, 937 P.2d 907, 910 (Colo. App. 1997): • Covenant not to compete must be drafted with the

primary purpose of protecting trade secrets. 3. Saturn Systems, Inc. v. Militare, 252 P.3d 516, 526

(Colo. App. 2011) • Narrowly tailored to protect trade secrets, and

nothing more.

Blue-Penciling: Colorado Three Key Cases

• How much consideration must an employee receive for a non-compete to be enforceable?

• Runzheimer Int’l Ltd v. Friedlen, 862 N.W.2d 879 (Wis. April 30, 2015) –

Wisconsin Supreme Court held continuing employment is sufficient consideration. – But opinion stated that if employee was fired “shortly after” signing, contract

formation principles may shield employee from enforcement.

• McInnis v. OAG Motorcycle Ventures, Inc. 2015 IL App (1st) 142644 (June 25, 2015) – Illinois Appellate Court found that at least two years of continued employment were required to constitute “adequate consideration.” – BUT: Northern District of Illinois in February refused to apply two-year bright

line rule. Bankers Life & Casualty Co. v. Miller, 2015 U.S. Dist. LEXIS 14337 (N.D. Ill. Feb. 6, 2015).

– Illinois Supreme Court has not weighed in.

Hot Topics: Consideration

• Brown & Brown, Inc. v. Johnson, 2015 NY Slip Op 04876 (NY App. June 11, 2015): In June the New York Court of Appeals held that applying Florida law in an employment agreement with a Florida choice-of-law signed by a New York resident would violate public policy. – “Truly obnoxious” to New York public policy.

• Ascension Insurance Holdings, LLC v. Underwood, C.A. No. 9897-VCG (Del. Chancery Ct. Jan. 28, 2015): Delaware Chancery Court applied California law in an agreement that had a Delaware choice of law provision (but was negotiated in CA between a CA resident and a DE LLC with its principal place of business in DE). – Court found that the non-compete provisions would violate

fundamental public policies of California

Hot Topics: Choice of Law

• A settlement agreement settling a race claim contained a no-rehire provision barring employee doctor from working at emergency rooms owned or run by defendant CEP. Golden v. California Emergency Physicians Medical Group, 782 F.3d 1083 (9th Cir. April 8, 2015)

• Doctor argued that the provision unreasonably restrained trade in violation of California law. – District Court ruled didn’t apply because no re-hire provision

wasn’t a non-compete

• Ninth Circuit reversed and remanded – found California Business and Professions Code did not limit itself to non-compete clauses and may apply (although did not state that agreement is void).

Hot Topics: Settlement Agreements

• Former Jimmy John’s employees sought to invalidate confidentiality and non-competition agreements and prohibit enforcement. Brunner et al. v. Jimmy John’s LLC et. al, 2014cv05509 (N.D. Ill Apr. 8, 2015). – Illinois federal judge dismissed complaint for lack of

standing because the employees could not show, and did not even allege, that Jimmy John’s enforced the terms of the agreement against them.

• Jimmy John’s disclaimed any intention to enforce against plaintiffs as litigation tactic.

Other Interesting Cases: Jimmy John’s

• 2010 Department of Justice antitrust action and 2013 civil class action for “no cold call” agreements against Adobe, Apple, Google, Intel, Intuit, Pixar, Lucasfilm, and eBay.

• Bilateral agreements not to cold-call each other’s employees.

• Agreements were NOT limited by geography, job function, product group, or time period.

Other Interesting Cases: High-Tech Employee Antitrust Litigation

• DOJ Settlement: Agreed to broad prohibition against entering, maintaining or enforcing any agreement that in any way prevents any person from soliciting, cold calling, recruiting, or otherwise competing for employees for five years.

• Civil class action: May 23, 2014, Apple, Google, Intel and Adobe agreed to settle for $324.5 million (Intuit, Pixar, Lucasfilm settled previously for $20 million) – Judge rejected the settlement – Defendants re-entered mediation – Final approval hearing on July 9, 2015 for $415

million settlement.

Other Interesting Cases: High-Tech Employee Antitrust Litigation (cont.)

• Agreements between employer and employee unlikely to have antitrust implications.

• DOJ is taking position that “no-poaching” agreements

between firms are per se violations of Section 1 of the Sherman Act (which prohibits agreements that restrain trade or commerce). – District Court held (in denying motion to dismiss) “it is

plausible to infer that even a single bilateral agreement would have the ripple effect of depressing the mobility and compensation of employees of companies that are not direct parties to the agreement.”

• Unilateral practices probably ok.

Other Interesting Cases: High-Tech Employee Antitrust Litigation (What’s Allowed?)

• Exxon Mobil Corp. v. Drennen, Case No. 12-0621 (Tex. Aug. 29, 2014)

• Permitted the enforcement of a noncompete-triggered forfeiture clause under New York law – reversing appellate court which found that Texas law applied and was unenforceable under Texas law.

• Choice of Law: – Concluded that NY law applied: finding that minimal

connections to NY were sufficient (e.g., the company’s shares were traded on the New York Stock Exchange)

– Determined that the forfeiture provision was not a covenant not to compete, and therefore did not violate Texas public policy.

Major Events In Unfair Competition: Texas

• New York and Delaware enforce forfeiture clauses • Delaware Choice of Law/Venue statute, 6 Del. C. §

2708: If the contract involves more than $100,000 in controversy, there is presumption of a significant connection with Delaware simply by choosing a Delaware venue in a contract.

• But – Ascension Insurance Holdings, LLC v. Underwood • Contractual agreement choosing Delaware must be

clear and express

Major Events In Unfair Competition: Why Exxon v. Drennan Is Important

• Consider forfeiture agreements for managers or others who receive incentive compensation: – If incorporated in Delaware will likely be sufficient – Invoke Delaware Choice of Law/Venue statute – Use mandatory language (“exclusive”)

Major Events In Unfair Competition: Why Exxon v. Drennan Is Important (cont.)

• Wisconsin: Star Direct, Inc. v. Dal Pra, 29 IER 986 (Wis. 2009) – Wisconsin Supreme Court held that a non-compete

clause was unreasonable and unenforceable, BUT – Also held that the customer and confidentiality

clauses were “reasonable and enforceable.” • Three clauses were “separate, independent, and

divisible covenants…”

Blue-Penciling: How This Is Playing Out In Other States

• Virginia: Home Paramount Pest Control Cos. v. Shaffer, 282 Va. 412 (2011) – “Janitor Rule:” If a non-compete would prevent an employee

from working at a competitor as a janitor, it is overbroad • Non-compete in Home Paramount prohibited employee from

working for a competitor “in any manner whatsoever” – In 1989, Virginia Supreme Court held that an identical provision

was enforceable – NOW: Virginia Supreme Court held that the non-compete

restriction was overbroad and unenforceable under VA law because it prohibited the employee from engaging in “all reasonably conceivable activities while employed by a competitor” • Court determined that not even narrow geographic and

temporal restraints could save the restriction to make the covenant enforceable

Blue-Penciling: How This Is Playing Out In Other States

• Illinois: Myraid “tests” developed by appellate courts to determine legitimacy of business interests overruled. – “near permanence” demoted from “test” to “factor” – “business interests” only one of 3 factors – All bright line “tests” abolished

• Now, courts are required to engage in a “three-prong rule of reasonableness” analysis looking at: – Restriction no greater than required (employer’s

legitimate business interest); – Undue hardship (employee’s burden); – Enforcement harmful to the public (public’s interest).

• In doing so, must look to the totality of the circumstances.

Blue-Penciling: How This Is Playing Out In Other States

• Previously, Georgia was one of the hardest states to enforce non-compete agreements – applying a “strict scrutiny” standard and an “all-or-nothing” rule.

• In 2010: Georgia electorate voted to amend the state’s

constitution to allow for legislation enhancing the enforceability of restrictive covenants. However, due to a drafting oversight related to the effective date of the amendment, the constitutionality of the statute was questioned

• April 2011: Substantially identical statute “re-passed” and

signed into law. Applies to all agreements entered into on or after May 11, 2011 (the Statute’s effective date)

Major Events In Unfair Competition: Georgia

• The Statute eliminates the “strict scrutiny” standard and the “all-or-nothing” rule. – Allows a judge to blue-pencil otherwise unenforceable

covenants by either striking language or reducing scope.

• Non-compete Covenants: – Now enforceable so long as reasonable in time, geographic

area, and scope of prohibited activity. – Only enforceable against certain categories of employees:

• Sales personnel • Brokers • Management personnel • Anyone performing the duties of a “key employee” or

“professional”

Major Events In Unfair Competition: Georgia

LITTLER COLORADO SHRM 2015 STATE CONFERENCE

LITTLER COLORADO SHRM 2015 STATE CONFERENCE